Fiscal Deficit is the sum of revenue and capital expenditure less all revenue and capital receipts other than loans taken.
It gives the difference between all receipts and expenditures other than loans taken to meet such expenditures.
Fiscal Deficit = Total Expenditure (that is Revenue Expenditure + Capital Expenditure) –
(Revenue Receipts + Recoveries of Loans + Other Capital Receipts (that is all Revenue
and Capital Receipts other than loans taken)).
Fiscal Deficit is not necessarily a bad thing. But large fiscal deficit over a long period of time can be an indication of worry.
Various reasons for high fiscal deficit can be :
- Spending on unproductive activities
- Tax evasion, complex tax system or ineffective tax collection process.
- High imports.
- Lesser FDIs
On the following pages analysis of past 30 years of fiscal defict figures is done.
Fiscal deficit of India as percentage of GDP
Year
|
Gross fiscal deficit
(Billions)
|
GDP(at Factor Cost)
(Billions)
|
GDP at market price
(Billions)
|
1980-81
|
82.99
|
7985.06
|
8663.40
|
1981-82
|
86.66
|
8434.26
|
9183.74
|
1982-83
|
106.27
|
8680.91
|
9502.94
|
1983-84
|
130.30
|
9362.69
|
10195.60
|
1984-85
|
174.16
|
9733.57
|
10585.15
|
1985-86
|
218.58
|
10138.66
|
11141.33
|
1986-87
|
263.42
|
10576.12
|
11673.50
|
1987-88
|
270.44
|
10949.92
|
12136.39
|
1988-89
|
309.23
|
12062.43
|
13304.86
|
1989-90
|
356.32
|
12802.28
|
14096.15
|
1990-91
|
446.32
|
13478.89
|
14876.15
|
1991-92
|
363.25
|
13671.71
|
15033.37
|
1992-93
|
401.73
|
14405.03
|
15857.55
|
1993-94
|
602.57
|
15223.43
|
16610.91
|
1994-95
|
577.03
|
16196.94
|
17717.02
|
1995-96
|
602.43
|
17377.40
|
19058.99
|
1996-97
|
667.33
|
18763.19
|
20497.86
|
1997-98
|
889.37
|
19570.31
|
21327.98
|
1998-99
|
1133.49
|
20878.27
|
22646.99
|
1999-00
|
1047.16
|
22462.76
|
24563.63
|
2000-01
|
1188.16
|
23427.74
|
25540.04
|
2001-02
|
1409.55
|
24720.52
|
26802.80
|
2002-03
|
1450.72
|
25706.90
|
27850.13
|
2003-04
|
1232.73
|
27778.13
|
30062.54
|
2004-05
|
1257.94
|
29714.64
|
32422.09
|
2005-06
|
1464.35
|
32530.73
|
35432.44
|
2006-07
|
1425.73
|
35643.64
|
38714.89
|
2007-08
|
1269.12
|
38966.36
|
42509.47
|
2008-09
|
3369.92
|
41586.76
|
44163.50
|
2009-10
|
4184.82
|
45076.37
|
47801.79
|
2010-11
|
3735.91
|
48859.54
|
52368.23
|
2011-12
|
5219.80
|
52025.14
|
55958.56
|
Source: http://www.rbi.org.in
Before 1991 :
Planning commission was set up in 1950 and since then central government was given powers to plan for economic development of country.
At that time first requirement was to make India self sufficient, so various industries were brought under control of government. No private firm could run these industries unless they get license from government. So India became a centralized economy, where control was imposed over the economy.
Direct and Indirect taxes were imposed in order to bring equality among low and high income groups and to generate income and to protect small scale industries.
In 1970-71 fiscal deficit was 3.04% . In order to bring equality and to generate revenue govt had increased income tax(Direct tax) to 97.5 % for personal income above 0.2 million ,which was later brought down to 77 % in 1974-75 . This resulted in drop of fiscal deficit to 2.94 by 1974-75.
In 1975 emergency was declared. This failure of democracy resulted in mistrust among investors. As a result fiscal deficit climbed to 4.19% by end of 1977.
In 1977 election Congress lost elections and for the first time Janta party came into power. Same year Industrial policy statement was announced. It stated that the areas which do not play role in development of country will be prohibited. This was total “NO” to foreign investment. Companies like Coca Cola and IBM were threw out of India. Also in 1978-78 and 1981-82 oil import cost had almost doubled as compared to previous years. Global recession was one added worry from 1980-83.These factors collectively resulted in rise of fiscal deficit, which climbed to a record height of 8.37% by 1987.
The Board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research and the Security & Exchange Board of India investigated the national economy as a whole. Better techniques were proposed to protect investor’s rights. Income tax was reduced to 50% in 1985-86. The National Housing Bank was founded 1988 and was forced to invest in the property market. But these attempted reforms could not control fiscal deficit. Rising oil prices and political instability resulted in the balance of payments crisis of 1991.
1991- 2002
In liberalization reforms of India 1991, following measures were taken:
- Rupee was devaluated.
- Import tariffs were lowered and restrictions on import were dismantled.
- Economy was opened for foreign investors
- Exchange rate system was changed to Market driven exchange rate system.
In 1992-93 Budget “liberalized exchange rate management” system was introduced. According to this exporters could sell only 60% of their foreign exchange earnings to dealers in open market while remaining 40% to be sold to RBI only at exchange rate decided by RBI. Main motive behind this was to discourage the imports and to increase foreign exchange reserves.
Also personal income tax brackets were reduced to 20, 30 and 40 percent in 1992-93.Earlier problem was that high rates were encouraging tax evasion.
Economic reforms, better and simple tax system and new exchange rate system all helped India to control its increasing fiscal deficit which fell to 4.84% in 1996-97.
In year 1998-99 fiscal deficit increased to 6.47%. In 1999 expenditure went up because of Kargil war, election expenses and enhanced food subsidies. Also slowdown in ‘manufacturing’, ‘construction’, ‘financing, insurance, real estates and business services’ caused deficit to climb to 6.47%.
Deficit and debt situation again threatened to go out of control in the early 2000s.
2002-2008
Some major concerns for India was subsidies being offered in order to help stabilize the economy. Government focused highly on revenue expenditure rather than capital expenditure. In 2002-03 and 2003-04, subsidies accounted for as high as 72.32 and 87.68 per cent of fiscal deficit. Other concerns were increasing imports and evasion of taxes.
Years 2001-02 and 2002-03 faced high fiscal deficit . One of the reasons for this was significant decrease in FDI inflows. Growth of FDI inflows recorded 7% increase in 2001-02 as compared to 2000-01 ,while growth rate was in negative for year 2002-03 as compared to 2001-02.
But internet boom in early 2000s resulted in low cost communication opportunities in India. India became the centre of attraction for outsourcing activities. ITES-BPO sector generated a lot of employment.
India saw fast growth in services sector. Be it financial, business services or transport, but banking and business services was fastest to grow. While others countries mainly focused on ‘call centre services’. India accounted for 51 per cent market share of the global off shoring work. Companies like Infosys, TCS, Wipro etc not only created employment also they accounted for stabilization in Indian economy.
Due to growth in industry and services govt. was able to minimize the fiscal deficit to 2.54 % in 2007-08.
2008-2013
In 2007-08 govt had estimated 2.5% fiscal deficit for year 2008-09. But India’s growth curve was halted by subprime crisis and overall slowdown in world economy.2008-09 recorded fiscal deficit of 5.99 percent.
One reason for such high fiscal deficit was cut in excise duty by 6 per cent and service tax by 2 per cent.
Additional expenditure for was implementation of sixth pay commission, which approved hike in salaries of govt. employees by 40%.
Due to worldwide recession FIIs started to pull out money from Indian stock market. As a result stock markets started crashing.
Currency started to depreciate. Increasing imports of crude oil were burdened with rising prices.
When country just started to show signs of recovery Euro crisis hit already paralyzed world economy.
Addition to worries was political instability due to scams such a 2G scam, coal mining fraud and anti corruption movements headed by Arvind Kejriwal.
Government has tried to stabilize the economy by starting with new set of reforms. Already FDI is opened in multi brand and single brand retail.
Remedies implemented are issuance of new bank licenses, cutting down the subsidies. Import duties on gold have been increased. Motive behind this is to discourage imports of gold, which is largest component of imports after crude oil.
Also Diesel is being decontrolled. Now companies can increase the prices to certain extent ,but according to instructions from ministry.
Finally estimate of fiscal deficit for 2012-13 stands at 5.06%.
Conclusion
Seeing the trends in fiscal deficit of India for previous years, only way government can curb it is by developing the neglected sectors. Such one area is agriculture. Also instead of spending money on subsidies , capital expenditure should be concentrated upon. Education system, fast approval of projects, proper implementation of policies are few areas where govt. should concentrate.
